The country’s largest debt settlement service provider will pay a steep price after allegedly cheating borrowers who got in over their heads.
Last week, the Consumer Financial Protection Bureau reached a settlement with Freedom Debt Relief in which the company, while not admitting guilt, agreed to pay a $5 million civil penalty as well as restitution of $20 million to affected customers.
The federal watchdog agency alleged in a lawsuit that the California-based company violated the Federal Trade Commission’s telemarketing sales rule by charging people in advance for debt relief services, which is illegal.
The CFPB further said the company broke a second law – the Consumer Financial Protection Act – when it charged debtors without settling their debts. The agency alleged that Freedom charged fees — sometimes thousands of dollars — even when borrowers themselves negotiated settlements with their creditors.
Additionally, the CFPB alleges that the company hid from customers the fact that several major banks have a permanent policy of never working with a debt settlement company.
Freedom also asked consumers negotiating their own settlements to “expressly mislead” their creditors when asked if they were enrolled in a debt settlement program, the CFPB alleged.
In response to the settlement, Freedom said it was working with the CFPB to resolve the issues raised in the lawsuit.
“In resolving the case, we have agreed to make some changes to our disclosures and policies to improve our program, many of which were implemented when the case was first filed,” Freedom said. in a press release.
This is how debt settlement or debt relief programs usually work: the company promises to work on your behalf, claiming that they are better at negotiating a deal to reduce your unsecured debts, such as than what you might owe on a credit card.
Consumers are often told to stop communicating with their creditors. Typically, clients are also advised to stop any payments they may be making and place the money in a bank account with the intention of the debt settlement company to offer creditors a lower lump sum offer. to what is due.
One of the biggest problems with debt settlement programs is that they can encourage consumers who manage to meet their payments to default on their debts. Debtors already in default are advised that they must also make payments to a bank account so that they too can accumulate enough money to make a lump sum offer to settle their debts at a lower cost.
This strategy makes sense on paper. Creditors or the collection companies they hire can spend a lot of time trying to collect what is owed to them. Thus, they may be willing to accept a lump sum.
But for those desperate to get out of a financial pit, working with a debt settlement company can make the situation worse. When you stop making payments to your creditors under a debt settlement plan, you are likely to trigger penalties, higher interest rates, and other charges.
Debt settlement is not cheap either.
“Debt settlement and similar programs offered by companies like Freedom often do more harm than good and turn out to be a waste of money,” said Andrew Pizor, attorney at the National Consumer Law Center. “Consumers should talk directly to their creditors and conduct their own debt settlement negotiations, or they should talk to a qualified consumer bankruptcy attorney.”
If you want low-cost debt relief, I suggest getting help from a nonprofit credit counseling agency. To find a local agency, go to the National Foundation for Credit Counseling website — nfcc.org. There is no shortcut to debt relief. So don’t believe the hype.
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